Spending, Deficit Concerns Arise With New Tax Law

By Kristina PetersonFeaturesDow Jones Newswires

While many Republicans celebrated the recent passage of their tax overhaul, some worry the party's year in control of Congress and the White House has done little to rein in federal spending.

Fiscal restraint has been a watchword for the party for decades. But various actions this year, including the tax rewrite, are expected to add to the federal deficit, with spending likely to increase in 2018.

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"Most of the drive upward has not been on the Democratic side, which is disheartening," Sen. Bob Corker (R., Tenn.) said. "It's been on the Republican side."

The new tax law, which President Donald Trump signed Friday, will add just under $1.5 trillion to the federal budget deficit over 10 years, according to the nonpartisan Congressional Budget Office.

A stopgap spending bill also signed by Mr. Trump on Friday to keep the government open through Jan. 19 included an additional $4.7 billion for ship repair and missile defense and $2 billion for veterans' health care. And the Senate voted 91-8 to retain in the spending bill a waiver that averts $25 billion in Medicare cuts triggered by the tax bill under budget rules.

Estimates differ of how much the tax bill would add to the deficit when the economic growth it is expected to generate is factored into the equation.

The Joint Committee on Taxation, the nonpartisan arm of Congress tasked with analyzing tax policies, estimated the GOP overhaul would generate about $451 billion in economic growth, leaving its net cost around $1.1 trillion over 10 years, as of Friday.

Many Republicans said they expected the tax bill to produce more growth, enough to more than pay for the cost of the bill's tax permanently lowered rate for corporations and temporary tax cuts for individuals.

"If the economy responds the way we believe it's about to -- and there are signs that's happening already -- I don't believe we'll have any trouble closing that gap," Senate Majority Leader Mitch McConnell (R., Ky.) told reporters Friday.

One key issue will be whether Congress will act to extend tax breaks that are currently temporary under the new law. Most of the individual income tax cuts would expire after 2025, and some very popular tax breaks could be squeezed sooner. For example, the bill retained a deduction for significant medical expenses for only two years, after which it becomes less generous.

Many observers believe Congress will act to extend those tax breaks, adding to its overall cost. When taken into account, the Committee for a Responsible Federal Budget estimated that the tax bill's total cost would be closer to $2 trillion to $2.2 trillion.

Democrats said the tax bill was the latest example of Republicans professing to care about the federal deficit in principle, but not in practice.

"How many speeches have they given about the sanctity of fiscal conservatism in cutting our debt?" Illinois Sen. Dick Durbin said. "That is the biggest broken promise that any Republican could make."

House Speaker Paul Ryan (R., Wis.) said that next year, he hopes to focus on reining in spending on federal safety-net programs he believes create a disincentive for people to find employment. That could mean changes to food stamps or other assistance programs. But that will be a hard sell in the Senate, where Republicans will hold a 51-49 majority. Mr. McConnell said he doesn't want to tackle curbing safety-net programs in the Senate unless there is bipartisan consensus.

Instead, lawmakers are likely to spend more money next year, beginning with a pricey January.

Next month, lawmakers are expected to pass a package of disaster-aid relief for victims of this year's devastating storms that is likely to cost at least $81 billion, if not more. Meanwhile, congressional leaders are negotiating a budget agreement expected to raise federal spending levels by around $200 billion over two years.

And lawmakers hope to delay several taxes established by the Affordable Care Act, extend other tax breaks and reauthorize the Children's Health Insurance Program for five years, though some of those measures may be offset by trims to the federal budget elsewhere.

Overall, many budget experts expect that as early as fiscal year 2019, Congress will have put the federal deficit at more than $1 trillion. That would put the deficit back to where it hovered immediately after the last recession, and up from $666 billion in fiscal 2017, noted the Bipartisan Policy Center, a nonpartisan think tank. The federal debt, essentially the accumulation of its deficits, crossed the $20 trillion threshold in September.

That return of the $1 trillion deficit would "occur while the longest peacetime economic recovery in America's history winds down," Steve Bell, a senior adviser at the Bipartisan Policy Center, wrote in a blog post last week, warning that interest payments on the debt could become larger than the annual defense budget. "These increased borrowing costs will inevitably fall on taxpayers. Deficits, like elections, have consequences," Mr. Bell wrote.

While large deficits after the 2008 financial crisis led the national debt as a share of the economy to double during the Obama administration, the budget never experienced much of a squeeze from all the new borrowing because interest rates fell to very low levels.

As a result of the Federal Reserve's campaign to hold down borrowing costs, joined later by other central banks in Europe and Japan, interest payments as a share of GDP in recent years fell to levels last seen in the 1960s. Now, with the Fed raising rates, debt service costs for the U.S. government could rise, adding to already-growing deficits.

But as next year's midterm elections approach, lawmakers are unlikely to take contentious steps to cut funding for any popular programs.

"The poor deficit hawk," House Minority Leader Nancy Pelosi (D., Calif.) said last week. "It's become if not an endangered species, extinct."

Richard Rubin and Nick Timiraos contributed to this article.

Write to Kristina Peterson at kristina.peterson@wsj.com

(END) Dow Jones Newswires

December 24, 2017 08:14 ET (13:14 GMT)